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Home > Enterprises > Maryland Alternative Enterprise Hotlist - Value-Added Processing

  • Overview
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Does Value-Added Processing Fit Your Operation?

Introduction

Value-added processing is a customer driven process that can offer farmers the potential to capture a larger share of the food dollar. The farmer’s share of the consumer’s food shopping dollar has decreased from 46 percent in 1913 to just under 20 percent in 2006, according to the USDA Economic Research Service. Why? Because consumers now buy more “ready-to-eat” or “ready-to-cook” food while farmers generally produce and market raw agricultural commodities.

Value-added products are defined by USDA as having:

  • A change in the physical state or form of the product (such as milling wheat into flour or making strawberries into jam).
  • The production of a product in a manner that enhances its value (such as organically produced products).
  • The physical segregation of an agricultural commodity or product in a manner that results in the enhancement of the value of that commodity or product (such as an identity preserved marketing system).

While there are opportunities with value-added processing, there are also increased risks. The risk varies with the size of the investment, the type(s) of product you choose to produce, and the market potential. Other risks to consider include the entrepreneur’s level of expertise, access to small scale processing equipment, technical support, regulatory requirements, and the entrepreneur’s business and financial management skills.

Some Questions to Consider

1. Are you willing to invest the time and effort necessary to plan this business, research the profit potential of processing and marketing your product, and evaluate your personal and material resources to determine if this type of business is a good fit for your family and your current farming operation?

Starting a value-added processing business, like any start-up business, takes careful planning. You will need to devote time to market research, phone calls, letters, office visits, and a lot of decision-making before you turn out your first jar of jelly or can of organic vegetable soup. Months or even upwards to a year is not an unreasonable amount of time to expect to spend in preparation for opening your business.

2. Who will purchase your product?

Anyone with a new product or service must know their target audience and, more importantly, why they would be willing to purchase the new product or service. What is your customer profile? What is their age, sex, income, buying habits, where do they live, how much do they spend on related items, where do they shop, even what do they read? This is market research.

3. What is your product and how will you make it?

If you want to make a food product for retail sale, with very few exceptions, you will not be able to make it in your home. This means that you will either have to build your own facility and buy equipment, rent existing facilities and equipment, or contract with an existing food processor to copack your product for you.

Also, it’s one thing to make small batches of your product for family and friends, but larger production runs demand developing large batch recipes. Where can you get professional advice on adjusting recipes and improving the shelf-life of your product? What is the shelf-life of your product? Where can you purchase the ingredients, packaging containers, labels that make your product attractive and safe to the public? This is market research.

4. Are you aware of the local, state, and federal regulations concerning food processing?

There may be local zoning ordinances or land use restriction that affect what kinds of businesses you can operate on your property. You will need to seek out training on basic food safety and sanitation procedures that ensure a safe food product. Your product will also need to comply with the Food Regulation Standards developed by the Food and Drug Administration (FDA).

You product may require a nutritional analysis or benefit from a specialty product label.


5. Can you make money with this enterprise?

A key characteristic of many small or on-farm specialty food processing activities is that they are “income patching,” where the processing activity is one of several sources of income rather than the processor’s sole source of support. How much time and financial resources can you commit to this new enterprise? How much will customers pay for your product? Consumers are generally willing to pay a slight premium for specialty or gourmet products, but these must be high quality products.

Knowing what your customers will pay is an important component in determining your break-even point. It will help you to determine how many units you’ll have to sell to breakeven. The second part of the profitability equation is your cost of production. You must calculate all your costs, both fixed and variable. How many units of your product must you sell to become profitable?

Remember, the goal is not to just breakeven, but to make a profit.

6. Do you consider yourself to be an agri-entrepreneur?

Risk is an intrinsic part of any business venture and starting a new food processing business can be risky. The costs of the uncertainty that comes with a new venture can be staggering in terms of stress on family relations, self-image, and personal bank accounts.

This business will demand you sharpen your business management skills and write a business plan that includes a detailed marketing plan for your new enterprise. This is where you’ll write down the goals for your business and how you plan to reach them.

7. Do you have the necessary capital investment required to fund this new business?

Successful businesses start small. With limited funds you may need to look at investing ingenuity first, labor second, and money third. Stephen Hall in From Kitchen to Market suggests, “Depending on your approach, you can expect to incur minimum start-up costs of approximately $35,000 to $100,000 or more for each year for the first three to five years.” (Hall p.xiv). Consider how you will develop your product and markets, work out production procedures, and learn the peculiarities of the industry before building permanent facilities, hiring labor, or quitting your day job.

Unfortunately, there is no simple blueprint to follow that applies to everyone for developing a value-added enterprise. The resources listed on this site can assist you in the process of identifying, selecting, managing, monitoring, and growing your value-added business.

University of Maryland Extension Resources

Other State Extension Resources

Governement Resources

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For more information about this website, please contact Ellen Green
Last Updated: November 5, 2009

 

 

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